SD Midweek: Today could play out in 1 of 4 ways, ranging from “meh” for gold & silver to “good” and even “great” for gold & silver. Here’s why…
To hike or not to hike?
Not like it matters in the grand scheme of things.
The real rate of inflation has been negative for years.
Regardless, the Kabuki Theater will have a feature showing at 2:00 p.m. EST today when the Fed releases its December FOMC Statement. This one will be followed-up by a Fed Head Jerome Powell press conference at roughly 2:30 p.m. EST.
We’ll get a post going with live coverage sometime between then and 3:00 p.m. EST.
What is the probability of a Fed rate hike right now?
CME Group puts the probability at 71.5%:
That probability is down from being over 77% one week ago, though it is up slightly from a month ago.
Yesterday, President Trump threw this out there:
I hope the people over at the Fed will read today’s Wall Street Journal Editorial before they make yet another mistake. Also, don’t let the market become any more illiquid than it already is. Stop with the 50 B’s. Feel the market, don’t just go by meaningless numbers. Good luck!
— Donald J. Trump (@realDonaldTrump) December 18, 2018
Though he hasn’t said anything about the Fed since yesterday morning.
We’re coming down to crunch time.
The stock market has certainly been on edge:
Just check out those late afternoon “saves”!
The cartel must be scared, weak, and working overtime this week!
OK, “Hey Half Dollar, everybody knows that’s end-of-day short covering from the day-trading HFT algos!”.
I’m not so sure I agree with that.
To me, it looks like desperately trying to prevent the Dow from closing below that April 2nd low:
I think we will clearly see the death cross by the time I write my Friday Wrap.
The VIX looks like it wants to spike as forecast:
And if the markets respond negatively to the Fed rate hike, we may just see the spike I’m looking for.
I think the mainstream wants to see the Fed hold here, and if in the slim chance the Fed does hold on interest rates, then I’m looking for some sort of relief rally in the Dow. If the fed does hike, which I think they will, then I’m looking for continued downside pressure on the stock market. As such, we should see more volatility ahead of us.
Yield on the 10-Year Note is at 2.81%:
At the rate we’re going, even the spread between the Fed Funds Rate and the 10-Year Note may invert.
The dollar is also about to face the moment of truth:
Either way, I think the dollar is topping here.
If the Fed pauses, that is a signal to the markets the Fed is becoming easier, and with the ECB discontinuing QE this month, that is a signal of Europe becoming tighter, so in the most simplistic of correlations, I think the dollar will begin its drop in earnest if the Fed pauses.
If the Fed hikes?
The dollar is still, for all intents and purposes, well, dead.
It’s just a matter of who pulls the plug to take it off of life support.
I have been talking about a bear wedge in crude oil:
The price of crude broke-down again with another leg lower. I must admit that was not the move I was looking for. Interestingly, the dollar is not rising despite a break-down in crude oil prices.
To me, I’m seeing some capitulation and a real good flushing of the crude oil market as we’re down slightly over 40% peak to trough.
Copper didn’t want to get left out of the break-down party:
From here, copper may very well retest those lows from mid-August to mid-September, but that’s about as far as I think copper could be going down in price.
Palladium continues its consolidation:
Which to me looks healthy and bullish.
Platinum could be turning the corner here:
If I’m right about the metals, platinum should start heading higher.
Which brings us to gold & silver, and the four possible scenarios for how the rest of the year plays out, starting from today.
- Fed hikes rates and sounds hawkish. This means the Fed is basically not flinching to President Trump’s words, and it also means the Fed is uber-bullish on the economy. This is the worst possible outcome for the stock market. Under this scenario, I think gold & silver would hold here as the markets come under pressure, but after some equities selling, I would be looking for a strong “flight to safety” move into the metals.
- Fed hikes rates and sounds dovish. I think this will be the general game-plan for the Fed. It gives the Fed the best of both worlds because this scenario not only keeps the illusion of a strong economy alive, but it also raises doubts as to the projected path of the rate hikes. In other words, this scenario will keep the markets guessing, which is what the Fed probably wants since its “independence” is coming under political attack from the White House. Whether the political attack is real or theatrical is beside the point – the Fed wants its “independence”, and by golly, the Fed defends its independence just as much as the Fed bashes gold, both literally and figuratively. Scenario 2 would be the “worst case” scenario for gold and silver because the propagandists will be spewing the “higher rates are bad for gold” bull crap as well as use the old, “see, all this uncertainty about rate hikes yet no-one is rushing into gold/barbarous relic/just buy volatility instead/pet rock” horse doo-doo.
- Fed holds and sounds hawkish. I don’t think this will happen. Why would you sound hawkish but not raise interest rates? Under this scenario, I think gold & silver would catch an immediate bid, and the markets wouldn’t buy what the Fed is sellin’. Furthermore, this would cause a serious blow to the Fed’s “credibility”.
- Fed holds and sounds dovish. This is the best case scenario for gold because it is both an easing of monetary conditions and also the Fed admitting that the economy is not in as good of health as many believe.
Gold has stood its ground amidst this week’s volatility:
We could surge above that 200-day this week!
Then the gold “market” would really start getting interesting. Also, check out the b-line for a golden cross of the 50-day moving average surging up and through the 200-day moving average!
The markets are about to get very interesting indeed.
Like gold, silver hasn’t come under the initial “sell the rumor” pressure I was looking for either:
Though I do not think silver will be sold on the news.
I think the metals are getting ready to rally.
As such, the top in the gold to silver ratio is looking more and more pronounced by the day:
OK, “Hey Half Dollar, everybody knows that’s a rising channel on the ratio and not a top!”.
But either way, it looks like the GSR is breaking-down here even if it is in a rising parallel channel:
Which is another way of saying get ready for the upside surprise in silver I have been looking for.
In my opinion, there are four possible outcomes for gold & silver following today’s FOMC statement and press conference (corresponding to the numbered list above):
- Delayed response in the rally due to hike and hawkish Fed
- More sideways action for longer due to hike and dovish Fed
- Near immediate rally due to hold and hawkish Fed
- Near immediate rally due to hold and dovish Fed
Which one do I think will be the case?
I think the Fed attempts to pull-off number 2. That is to say, they hike interest rates but sound dovish.
This is not a “bad” scenario for gold & silver per se, but it is the scenario which takes longest for the rally to develop.
The question is will the markets buy the Fed’s bovine excrement yet again?
I don’t think so.
I think we begin the rally sooner than later.
And I think we get the upside surprise.
– Half Dollar
About the Author
U.S. Army Iraq War Combat Veteran Paul “Half Dollar” Eberhart has an AS in Information Systems and Security from Western Technical College and a BA in Spanish from The University of North Carolina at Chapel Hill. Paul dived into gold & silver in 2009 as a natural progression from the prepper community. He is self-studied in the field of economics, an active amateur trader, and a Silver Bug at heart.